Weekly Market Review and Outlook –Week Ended Feb. 12, 2016

The Nigerian equities market was broadly bullish this week as the benchmark index closed in the green on all trading days of the week. Market performance was majorly driven by bargain hunting in bellwethers, thus W-o-W return improved 5.1% and YTD loss moderated to 13.8% as the NSEASI settled at 24,689.69 points on Friday. However, activity level in the market was mixed, as average volume depreciated 71.2% while average value gained 37.3% W-o-W to 278.9m units and N3.5bn respectively.

Performance across sectors was mixed. The Industrial Goods index advanced the most, up 8.6% W-o-W, consequent on bargain hunting in DANGCEM (+17.9%). Similarly, the Oil & Gas Index improved 8.2% W-o-W, buoyed by the rally in FORTE (+14.0) and SEPLAT (+3.7). Contrarily, sell offs in MANSARD (-4.9%) drove the Insurance index 1.3% southwards W-o-W. Likewise, the Banking and Consumer Goods indices fell 1.1% and 0.1% W-o-W on account of losses in ZENITH (-4.9%), ETI (-6.1%) and GUINNESS (-2.5%).

Although market sentiment improved this week, it remained negative as market breadth -measured by advancers/decliners ratio- settled at 0.86 (against previous of 0.7x) as 25 stocks gained while 29 stocks lost. The best performing stocks for the week were DANGCEM (+17.9%), FORTE (+14.0%) and MOBIL (+8.1%) while CONOIL (-18.0%), MAYBAKER (-13.0%) and GLAXOSMITH (-9.8%) declined the most. We believe recent uptrend in the market may not be sustained as fundamentals remain weak, coupled with the unimpressive earnings expectation. However, we expect increased buying activity in dividend paying counters as investors bet on stocks with consistent dividend paying history currently trading at attractive prices ahead of full year earnings and corporate actions.

Foreign Exchange
In line with recent trend observed in the Nigerian foreign exchange market, forex illiquidity has continued to see exchange rate depreciate at the less-regulated segments (BDC and parallel markets) as demand remains atop supply. Interbank liquidity declined by as much as N580.0bn on Tuesday after banks made provisions for a CBN currency auction held on Thursday. The official (CBN) and Interbank rates have remained stable at N197.00/US$1.00 and N199.10/US$1.00 respectively due to the subsisting fixed exchange rate policy of the CBN, while the spread between the official and the less regulated segments continue to widen.

Exchange rate at the BDC segment opened the week at N307.0/US$1.00 on Monday and depreciated N2.00 by mid-week. On Thursday, rates spiked to N317.0/US$1.00 and N325.0/US$1.00 at the BDC and parallel markets respectively. This spike may not be unconnected to the report from the Bankers’ Committee meeting on Thursday from which a consensus was reached between the CBN and DMBs that demand for foreign exchange would only be met for development of the real sector. Media reports also quoted the CBN Director of Banking Supervision as saying 15.0% of forex demand stems from school fees and medical bills payment purposes and urged Nigerians to begin to look inwards. We suspect these reports may have fueled speculative hoarding of FX in anticipation of further restrictions, hence the spike in the BDC and parallel market rates. We expect to see more volatility in the non-official segments as the CBN remains unwavering in its current exchange rate policy.

Money Market
The financial system opened the week with a high level of liquidity (N996.0bn) due to refunds made last Friday for unutilized Naira liquidity provided by DMBs (Deposit Money Banks) for the CBN’s weekly forex intervention held last Thursday. Consequently, OBB (Open Buy Back) and O/N (Overnight) rates closed flat at 0.7% and 1.0% respectively. However, as DMBs made provisions for the CBN FX intervention auction for this week, money market rates increased on Tuesday with OBB closing at 2.4% and O/N at 3.0%.

Consequent on maturity of OMO bills worth N268.0bn that raised system liquidity on Thursday, money market rates dropped to 0.6% and 1.0% for the OBB and O/N respectively while NIBOR rates closed at an average of 7.4%. Interbank rates dropped further on Friday after refunds were made for unfulfilled bids at the currency intervention auction with the OBB and average NIBOR rates closing at 0.5% and 7.3% respectively while the O/N rate was flat at 1.0%. We expect the wide swing in interbank rates to continue next week, dictated by FX intervention provision and refund as well as a T-bills maturity N142.4bn and auction of the same amount.

Relatedly, performance in the T-bills market was mixed this week as rates rose on Monday following a pre-market notification of an OMO auction. Hence, average T-Bills rates closed at 6.5% on Monday before dropping to 6.3% a piece on Tuesday and Wednesday in anticipation of the OMO maturity of Thursday. The rise in money market liquidity following the OMO maturity on Thursday and FX refund on Friday drove bullish sentiment with rates dropping across all tenors, closing at an average of 5.9% on Friday, 42bps lower W-o-W. We expect activity in the coming week to be driven by liquidity dynamics.

Bond Market
This week, the Debt Management Office (DMO) conducted its monthly auction for February with the re-opening of the FEB 2020 and JAN 2026 instruments with amounts offered of N40.0bn and N50.0bn respectively. At the end of the auction on Wednesday, with total bids of 210 and 170, only 92 and 99 bids were successful for the FEB 2020 and JAN 2026 instruments respectively. The DMO also reported an oversubscription of N122.7bn against N40.0bn allotment for the FEB 2020 and N111.6bn against N50.0bn for the JAN 2026 instruments.

The instruments on offer - FEB 2020 and JAN 2026 - were issued at marginal rates of 12.2% and 12.4% respectively, 5bps and 11bps lower than the marginal rates at the January auction. This was against lower domestic borrowing expectation of government than initially expected; underscored by the recent announcement by the Minister of Finance who stated that about N2.2tn has been saved from the Treasury Single Account (TSA) and earlier announcements that a significant proportion of the budget deficit may be funded from multilateral sources. The amount offered by the DMO at the January and February bond auctions were also at the lower bound of its 1st Quarter 2016 issuance range guideline.

The secondary market opened relatively quiet this week as traders awaited the bond PMA that was held on Wednesday. Yields however trended downwards marginally on most trading days and average yields declined 14bps W-o-W to 11.0%, driven by bullish sentiment at the mid to long end of the curve while short term yields rose. We expect yields to remain pressured in the short term due to risk aversion for riskier assets, easy monetary policy and lessened expectation of increased domestic borrowing to plug fiscal deficit. However, our mid-term outlook still points to a tightening of monetary policy which could be an inflection in the sentiment driving the market.